Profitability Ratios - Gross, Net, Operating Profit Margin in Hindi |#27 Master Investor - YouTube

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Namaskar, My name is Mukul, and welcome to the Asset Yogi channel

where we don't lock but unlock the knowledge of finance

In my previous videos, I gave an introduction to financial ratios

If you haven't watched it, then you should watch it first. You will find the link in the description below.

In this video, we will understand the profitability ratio in detail

In profitability ratio, we will see gross profit margin, operating profit margin, and pretax

margin as well as net profit margin. What are they and how are they calculated?

then we will see what they actually mean when you invest in the stock of any company

So you compare it with other companies also

and when you compare the profitability ratio of all companies

then you would know the complete story of a company

So watch this video from the beginning to the end so that you can understand the concept completely

Let's go straight to the blackboard

So when we talk about profitability, then we talk about two types of returns

One of them is the return on sales

which means, how much profit percentage is earned on the sold goods

the second one is the return on investment

investment means the amount of capital applied whether by taking loans, by an investor, or by using your own money

how many returns did you get on it in total?

There are mainly 4 matrices in return on sales

First is Gross Profit Margin, second is Operating Profit Margin

The third is Pretax Margin, and the fourth one is Net Profit Margin

In Return on Investment, there are Return on Assets(ROA), Operating Return on Asset, Return on Total Capital

including debt and equity

then you can find out the return on equity separately and there is a return on common equity also

which is mainly used for finding outstanding shares of listed companies

now we will look into all these terminologies slowly

In this video, we will concentrate mainly on the return of sales

we will look at Gross Profit Margin, Operating Profit Margin, Pretax Margin, and Net Profit in detail and

will see in what ways we compare different companies

So first we will look at a general income statement to know in what way will you get all these heads

Let's take an example of a shoe manufacturing company

and have a look at its income statement, it is a hypothetical example

assuming the revenue of this company in two years is, let's say 2,00,00,000

its Cost of goods sold, the cost of making the shoes

which includes material and labor cost

was 80,00,000 for one year

So when you subtract the Cost of Goods Sold from the Sales revenue, here revenue we are talking about is sales

so when you minus COGS, then you get the Gross Profit

So 1,20,00,000 would be your Gross Profit

From this, Let's say you subtracted 20,00,000 of marketing and sales expenditure

Office & admin expenses, let's say around 10,00,000 were also subtracted from it

So your EBITDA shows up, which is Earnings Before Interest Taxes Depreciation and Amortization

So after subtracting these 30 lakhs, you get 90 lakhs

Now what exactly is EBITDA, what is EBIT, what is operating profit, I have made a detailed video on these topics

So do watch my video, there you will understand it in detail.

After that, when you subtract Depreciation and Amortization from EBITDA

Assume a loan was taken to put some planted machinery in this factory

So we take Depreciation of such assets

So let's say you subtract 10 lakh from it

And let's say that the Amortization is zero

So we get EBIT from it, after subtracting Depreciation and Amortization from it

Now your EBIT will be 80 lakhs

So for practical purposes, this would be our Operating Profit.

I have made a detailed video on Operating Profit also

where I talked about EBITDA, EBIT, and Operating Profit

So for practical purposes, I am assuming EBIT as Operating Profit because

it contains only sales revenue, there is no other income

If other income is there, then you have to subtract it

Other income like income from some interest in any investments

If there is any rental income, then it won't be included in any sales

So that has to be subtracted, but since this, all is our sales revenue

EBIT would be our Operating Profit

Now from EBIT, you subtract the interest,

whenever interest portion is subtracted in any loan, then you get profit before taxes

After that, you subtract the tax

I am assuming approximately 30% tax which will be subtracted

Then you will get net profit

So now let's see how to calculate all the margins

The first one you have is Gross Profit Margin

The formula for Gross Profit Margin includes simply dividing Gross Profit by Net Sales

we want to see how much percentage of sales is our Gross Profit?

Right? So you will divide the Gross Profit by the revenue, that is net sales, which is 2,00,00,000

So if you want to find Gross Profit int this case

1 crore 20 lakhs, which can be written as 120 lakhs, divided by 200 lakhs

So this becomes 0.6

that means 60% is our Gross Profit Margin

Then for Operating Profit Margin, you divide Operating profit by Net sales

So in our case, Operating Profit is our EBIT

SO this becomes 80 lakhs divided by 200 lakhs

This will come to 0.4, which means 40% is your Operating Profit Margin.

Now if you want to find out Pretax Margin then

you have to divide Profit Before Taxes (PBT) which is 60 lakhs

By the Net Sales

So we will divide PBT 60 lakhs by 200 lakhs

which comes to 0.3

that means you have a 30% Pretax Margin

For Net Profit Margin, we will divide Net Profit by Net Sales

So it will become 42 lakhs divided by 200 lakhs

which basically becomes 0.21, which means 21% is your Net Profit Margin

So this was all the calculation, now we will understand why do we have to do these calculations

If you talk about Gross Profit Margin

so when you will compare companies, then you would want to

have its Gross Profit Margin as high as possible, its obvious every company would want that

So how to get High Gross Profit Margins?

Now, if pricing is high of any product

then naturally that company can command its premium right?

Its profits can be increased because of its pricing, that is Gross Profit Margin

Or the product's cost should be very low

now, why would the pricing be higher?

Because that company may have a competitive advantage, it may have a superior product

now if we talk about iPhone, it is a superior product, right?

So it also has a superior branding, which also gives it a competitive advantage

Its technology can also be exclusive

Because of this, any product can command higher pricing

The other one is lower costs

now how can the cost be lowered of any product?

Economies of scale, meaning putting a very larger scale of factories

or the operational efficiencies were improved greatly

So it lowers our cost, because of this Gross Profit Margin

improves, so whenever you compare companies

then you will see things like whose Gross Profit Margin is better

And if Gross Profit Margin is good, then is it sustainable?

meaning that if your initial Gross Profit Margin is good but you don't have

exclusivity, you don't have an advantage in technology, neither in branding nor in product

then it won't be sustainable

So you would have to focus on these things while observing any company

after that, we come on operating profit margin

what does operating profit margin tell us? and how is it different from gross profit margin?

we calculated gross profit margin this much earlier by the gross profit

after that, we see the expenses of marketing and sales, office and admin, and the costs of depreciation and amortization are all here

So all these costs are extra

that means, they tell us

For example, let's assume the operating profit margin of any company is increasing

and your gross profit margin is the same

so this means the company can control its operating cost nicely

and if the growth of operating profit margin becomes lower than the gross profit margin

that means the company is not able to control these operating costs

as marketing and sales, it may be this office and admin expenses are increasing

Depreciation may have been considered too much

this too can lower our operating profit margin

so operating profit margin can be understood mainly by operating cost additionally when we compare it to gross profit margin

now we will talk about Pretax Margin

In the pretax margin, what is different from operating profit margin

here this interest is different, interest is also subtracted from operating profit

now assume here it was 40 lakhs interest instead of 20 lakhs

So our profit before tax would have been 40 lakhs only

so when we calculated the pretax margin earlier

which was 30%, would now have remained 20% only

so let's assume your company is paying a very high interest

So naturally, your pretax margin becomes lower

now when you compare two companies,

then you can see that assuming a company's operational efficiencies are very good, gross profit margins are very high

and assume slowly its interest portion is becoming shorter

that means its situation is improving, its pretax margins would be improving

So pretax margins basically show us the effects of debts

that if you have taken a loan then what effects would be there on the margins by filling the interest portions

then in net profit, all your expenses are subtracted, whether it be operating expenses, or not operating expenses

So it gives you the overall picture of a companies profitability

net profit margin is quite common, whenever we talk of simple profit margin we talk about net profit margin only

net profit margin is compared foremost by anyone who's an analyst or anyone who wants to invest in stocks

but net profit margin doesn't tell you the whole story, that is why you need the gross profit margin

operating profit margin, pretax margin, and net profit margin to be calculated when you compare one company to another

now we will talk about comparison on companies

that if you want to compare on the profitability of companies, then how will you compare

assuming you want to compare four companies

then you may try to compare Asian paints with Infosys, Reliance, Tata Motors, and their gross profit margins,

operating profit margin or net profit margin by each other

but this is an absolutely wrong way

you should compare companies of the same sector

now Asian Paints is a paint company, so you will compare it with a paint company only

you will not compare it with a tech company like Infosys

So Asian Paints will be compared with Akzo Nobel, Berger Paints, Nerolac

If you have to compare Infosys, then you will do it with TCS, Wipro, Cognizant

a similar type of companies have to be compared and we have to see whose margins are becoming better over a period of time.

who is able to control its costs, who is able to make its product superior

I hope you liked this video, then do like and share this video

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